Commodity Futures Trading

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War Torn Super Cycle. The Energy Report
By: Phil Flynn | April 10, 2024

The Commodity Supercycle that seemed dormant late last year has awakened, incredibly. While many thought that the cycle had passed, it is clear now that price respite was just the eye of the commodity prices super cycle hurricane. The historic record-breaking price surge that we have seen in cocoa may be a preview of what we may see in other commodities where it appears demand will outstrip supply. Commodities like copper, silver, platinum, palladium, and of course the world’s black gold, oil that Texas tea, are headed for supply squeezes unlike anything we have seen since the 1970s and it did not happen overnight. It happened while the world was sleeping.

Underinvestment in fossil fuels as well as a hostile regulatory environment, means global oil supplies are going to be short. Even the Energy Information Administration in their recent short-term energy outlook not only had to raise the oil prices but also had to adjust their downward projections of future demand in an attempt to perhaps justify their previous massive adjustments to their numbers. In other words, the EIA had to raise their demand forecasts before they could lower it. The EIA raised their forecast of WTI crude prices to average $83.78/ barrel(bbl) in 2024, versus an earlier forecast of $82.15/bbl. The EIA also raised its Brent Crude prices to an average of $86.98/bbl in 2025, versus an earlier forecast of $84.80/bbl. Yet it was demand where they had to raise the river instead of lowering the bridge to make their forecast jive.

Or as the EIA put it, “This month we revised the 2022 global liquid fuels consumption data available in our International Energy Statistics, increasing our assessment of global oil consumption that year by nearly 0.8 million barrels per day (b/d) compared to last month’s STEO. The historical data serves as a baseline for our short-term forecasts, affecting our view of energy markets this year and next. This month’s revision to historic data, as well as current market dynamics, led us to increase our forecasts for global oil consumption.” Yet if you want to be confused, then they go on to say that after the adjustment the EIA cuts forecast for 2024 world oil demand growth by 480,000 bpd, now sees 0.95 mln bpd year-on-year increase. And cuts forecast for 2025 world oil demand growth by 30,000 bpd, now sees 1.35 mln bpd year on year increase.” Are they trying to hide their meaning here?

What they won’t be able to hide is rising gasoline prices. The EIA raised its forecast for retail gasoline prices in 2024 to $3.59 a gallon, versus an earlier forecast of $3.48 a gallon.

Yesterday the market was reluctant to move higher as it tried to digest headlines surrounding geopolitical risk that could have major implications for the price of oil and the potential movement for oil. Last week oil put in a lot of risk premium on the expectations that Iran would respond directly against Israel after the attack on its compound in Lebanon. Yesterday there was an unconfirmed report that an Iranian envoy was en route to the United States for some talks to avoid a conflict and made the rounds even though the story wasn’t confirmed.

Another headline that took out some more premium was the report that the US Defense Secretary heard from Israel that there is no set date for its invasion of Rafah, raising hopes that there could be some hope for a ceasefire even if a ceasefire talks broke down. That was after Prime Minister Benjamin Netanyahu said Monday that he has set a date for the IDF to launch its much-anticipated offensive in the southern Gaza city of Rafah. All of this is happening and swaying the market.

Now the American Petroleum Institute (API)report seemed to suggest that supplies from the seasonal viewpoint are very tight but based on weekly numbers are less than inspiring to the bullish side of the market.

The API reported the crude supplies increased by 3.034 million barrels which was more than the market had anticipated but from a seasonal viewpoint smaller than most builds at this time of year. Gasoline inventories fell by 609,000 barrels and distillates rose by 120,000 barrels which wasn’t that inspiring to either the bulls or the bear. The products have been under pressure. This week’s report, if confirmed today by the Energy Information Administration report, could give us the bottom for the products.

Yet what may be important to the oil and product traders today will be the consumer price index. The market fixation on whether or not the Federal Reserve is going to have the ability to cut interest rates as inflation continues to be strong is the question on most traders minds. The key thing here is that even if the Federal Reserve has to backtrack on a rate cutting, the reality is it won’t impact oil demand quickly enough to save the market from a supply squeeze.

What we expect is that oil will react to a hot or cold report in the long run. It’ll be the supply deficit that will keep support under this market. Remember all that talk about peak oil supply and then the switch over to peak oil demand? Well apparently in the big picture neither one of those predictions is correct. There is a new report by Enverus Intelligence Research that expects global oil demand will grow by 108 million barrels a day by 2030 and will not see peak demand at the end of the decade. The quiet little secret known by many people in the oil industry is simply this: the predictions of peak oil demand were greatly exaggerated.

Speaking about being greatly exaggerated, did you know that Treasury Secretary Janet Yellen is trying to tell people that she believes that the Russian price caps worked? I’m not kidding you. My good friend and noted oil analyst Anas Alhajji said, “Yellen’s price caps on Russian oil are a joke and have no impact. Attacks on Russian refineries meant more crude to export. Here is what Argus wrote today: “Russian crude production rose by 30,000 b/d to 9.44mn b/d, just 10,000 b/d shy of its target. Drone attacks have damaged over 800,000 b/d of Russian refining capacity in recent months, freeing up more crude for export — shipments hit an 11-month high in March.” Take that, Vladimir. Now let’s talk about those so-called sanctions on Iran that have given them billions of dollars. Never mind…I am running out of time.

Let’s move on to natural gas quickly. Reports that Freeport is going to get back online a month earlier than expected and more capacity coming online for LNG exports is giving us a ray of hope that maybe the bottom is in for natural gas. What’s interesting to note is the Energy Information Administration pointed out that for the first time in history, the cost of natural gas is lower than coal. This should be incredible news for people who are concerned about greenhouse gas emissions. The United States is the biggest producer of natural gas and we can change the world by providing cheap natural gas to replace coal plants thereby reducing greenhouse gas emissions. Incredibly this comes even as the Biden administration plays politics with projects surrounding LNG exports.

In yesterday’s Short-Term Energy Outlook, the EIA reported that, “The U.S. winter natural gas withdrawal season ended with 39% more natural gas in storage compared with the five-year average. From April through October this year, EIA forecast less natural gas will be injected into storage than is typical, largely because we expect the United States will produce less natural gas on average in 2Q24 and 3Q24 compared with 1Q24. Despite lower production, EIA still expects the United States will have the most natural gas in storage on record when the winter withdrawal season begins in November. As a result of high inventories, we expect the Henry Hub spot price to average less than $2.00 per million British thermal units (MMBtu) in 2Q24 before increasing slightly in 3Q24. EIA forecast for all of 2024 averages about $2.20/MMBtu.

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